After the revelations from the Financial Services Royal Commission, recently announced cartel charges against ANZ (ASX: ANZ), two investment banks and six current and former employees of these three banks have only added to the reputational damage for all the big four banks.
ANZ, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC) and NAB (ASX: NAB) make up around 23% of the S&P/ASX 200 Index at the time of writing. As such, it’s likely that most readers have at least some – and more likely, substantial – exposure to these four banks, either directly or via your SMSF or third-party managed super fund.
So it’s worth considering the potential consequences of all this on the big banks.
Cartel fine manageable
First, the easy part.
Assuming ANZ (and Citi and Deutsche Bank) are found guilty on the cartel charges, any fines imposed on the bank are manageable.
While ANZ could potentially be fined up to 10% of its turnover – which could mean a fine of more than $2bn – the bank made nearly $7bn in cash profit in 2017 so it can clearly pay such a large fine, although it may lead to a likely temporary reduction in dividends to pay for it and maintain its capital levels above ASIC’s required minimum.
In terms of the Financial Services Royal Commission, the likely outcome is almost certainly more regulation on the banking sector.
While this will increase compliance costs, more regulation actually benefits the larger banks at the expense of their smaller competition. This is because the larger the organisation in terms of revenue and profits, the more easily it can cover the fixed costs of regulation compared to its smaller competitors.
Unless the regulators take care to ensure only the big four banks are affected – a difficult task – increased regulation could actually be a positive for the big four banks over the longer term as it further entrenches their market dominance.
This has occurred in the United States after the massive increase in regulation in response to the GFC: the supposedly “too-big-to-fail” banks such as JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) have just become even bigger and more dominant as a result.
However, on the whole, most of the other potential consequences from the Royal Commission are bad for the big four.
Allegations that the banks have been too lax when determining whether customers requesting business or home loans can actually afford them will likely mean credit will be harder to come by as the banks take a more stringent line when granting credit.
This could make it harder and more expensive for small businesses in particular to obtain loans, while also potentially making it harder for people to take out loans to buy or house or refinance their existing loans.
While it makes sense for the banks to actually ensure their debtors can repay them, all things equal this is likely to lead to slower growth in profits and dividends.
It could also have negative flow-on effects for economic growth and house prices, as tighter and more expensive credit leads to slower economic growth and reductions in house prices, respectively (again, all things being equal).
And with the banks so on the nose with the public, it’s no surprise that politicians from both parties are trying to increase competition in the banking industry.
The government has announced that “open banking” reforms will begin from 1 July 2019. “Open banking” means the customer, not the bank, owns his or her banking data and so has the ability to provide that data to the banks’ competitors to try to get a better deal on savings accounts or credit cards.
With various fintechs already muscling in on the banks’ turf, open banking is likely to see the big banks facing even more competition.
Finally, while it may appear unlikely at this stage, there is also the possibility that Australia’s big four banks follow the lead of their United States and United Kingdom counterparts in having to fork over millions or even billions of dollars in compensation for the various forms of misconduct revealed at the Royal Commission.
For example, UK “challenger” bank CYBG (ASX: CYB) has been forced to set aside £2.5bn for mis-selling of payment protection insurance (PPI), while Bank of America (NYSE: BAC) has paid a staggering US$76bn in fines and penalties as a result of wrongdoing in recent years.
With a hostile government (whichever party is in control), the Royal Commission’s findings could spur the government to try to impose similar fines on Australia’s big four, while class actions could also lead to substantial payouts.
All in all, readers probably won’t be surprised that I think the Royal Commission is likely to be negative overall for the big four banks.